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Hazlett in Business Week: Misguided Urge to Regulate Wireless

Professor Thomas Hazlett finds it perplexing that during the current economic recession, government regulators are eyeing iconic innovations such as the Apple iPhone and the Blackberry Storm.

Wireless carriers market the smartphones by subsidizing the handsets and requiring two-year service agreements. The monthly fees they collect offset their losses on the phones. The U.S. Senate and the U.S. Justice Department have taken steps to examine allegations that the practice is anticompetitive, while Senator John Kerry (D-Mass.) has recently called for an inquiry into the iPhone and Storm.

Hazlett proposes that regulators are missing the point.

"These products are precisely the disruptive technologies that policymakers should herald," he says. "Yes, we need to investigate them—to figure out how to encourage more of the same."

Subsidies, says Hazlett, extend corporate rivalry and enhance technology adoption. Carriers aggressively pursue the most attractive products and applications for use on their networks, consumers benefit from the competing models technology companies are rushing to market, and "volume discount" rewards users who commit to supporting a network.

"When Washington turns its gaze on the very killer apps we should be celebrating, we've found what needs fixing," Hazlett concludes.

Excerpt:"In Belgium—the sole European Union country to ban phone subsidies (under a 1935 statute banning sales tying a product to a service)—the iPhone went on sale for $1,000, its highest price in the world. The EU recently struck down the subsidy prohibition as anticompetitive in a case brought by Belgian gas stations that objected to a rival offering customers free towing service if they bought so many liters of gas. The EU (correctly) upheld the discount and tossed the law. Now Belgian iPhone buyers will benefit via lower prices. Perhaps they'll also get free towing.

"Finland banned handset bundling until 2006. The rule was scrapped by the Finnish government because individual customers were not buying new, expensive 3G phones. This gave application developers little incentive to design useful add-ons, further reducing 3G handset demand in a vicious circle of stagnation. When the ban was dropped, new technology adoption took off, courtesy of network subsidies—and customer contracts."